The USO ETF’s command of the WTI crude market has taken a breathtaking drop in the last few months. Having held close to 100,000 WTI contracts at the end of February (amounting to nearly 20 per cent of the WTI market) it has now halved to some 50,000 contracts.
So where did all that money go?
Stephen Schork of the Schork Report highlights on Monday just how much the drop-off in the USO has coincided with the build up in the US Natural Gas Fund, another ETF belonging to the same group of funds. Note the following chart:
As Schork notes, nat gas fundamentals have hardly been bullish of late. Despite this, Nymex nat gas futures, which were at multi-year lows till recently, recorded a 21.5 per cent rise in the week. This, of course, will have had a lot to do with the accompanying rally in the oil futures. But, as Schork writes, the UNG fund may have contributed significantly in forging some sort of floor in the market, especially since the nat gas ascent is now leading the entire S&P GCSI complex higher month-to-date (not just the last week or so).
As Schork explains:
Since March the number of shares outstanding in the United States Natural Gas (UNG) exchanged-traded fund (ETF) have surged 260%, from 37,500 to 98,000. At the same time, interest in the equivalent crude oil ETF, the USO, has dropped 39%, from 157,800 at the end of February to 96,100. Thus, last week equal amounts of bets were being placed on both commodities, whereas two months ago passive investors in energy favored crude oil at a 4:1 margin.
Just as was saw in February in the oil ETF, the flood of money into the UNG has undoubtedly helped to establish a floor in the NYMEX market — regardless of extant weak fundamentals — and is now propelling the market higher. To wit, with natty’s strong performance last week we imagine that will serve to attract even more funds into the UNG, et al.
All of which does make sense, as Schork goes on:
Given WTI’s push towards $60 (and beyond), natural gas — regardless of extant weak fundamentals — is cheap. So if you are a passive investor and you want to play the energy trade, then buying gas in our book makes a lot more sense then punting WTI.